Aid groups optimistic about Sudan's decision to float its currency

It’s taken a small fortune to operate as a humanitarian organization in Sudan. The staggering levels of inflation in the country have meant that aid organizations have at times had to pay seven times what something is worth on the market. The country has one of the world’s highest inflation rates — it hit over 300% last month. One organization said it paid about $9,200 a month to rent a 4x4 vehicle. The problem was the massive gap between the official and black market exchange rates. Over the past year, Sudan’s official exchange rate, set by the government, remained stable at 55 Sudanese Pounds per U.S. dollar, while the black-market exchange rate has risen exponentially. It recently surpassed 400 Sudanese pounds per U.S. dollar on the black market and has fluctuated wildly on a daily basis. Humanitarian organizations must use the official exchange rate, meaning they paid exorbitantly high prices to implement programs, crippling their ability to reach more people. This has been a key impediment to operating in the country, according to aid groups. “A lot of our budgets … just get eaten up by the inflation,” said Anika Krstic, country director at Plan International’s Sudan office. Some of the humanitarian responses impacted include the flow of refugees from the conflict in Ethiopia into eastern Sudan and the response to displacement in West and South Darfur. But on Sunday, Sudan’s transitional government announced that it will float and officially devalue the currency following calls from the International Monetary Fund to do so, as a way to boost growth and investment. The move is a much-welcomed development for the aid sector which is optimistic that it will provide fiscal relief in an already complicated operating environment. “The decision to liberate the exchange rate will definitely have a positive impact on the cost-efficiency of humanitarian projects.” --— Andrea Koulaimah, director for EU humanitarian operations, sub-Saharan Africa A floating currency is determined by supply and demand, rather than a fixed rate set by a central bank. Under this new set-up, the Central Bank of Sudan will announce a rate on a daily basis, and banks must exchange within 5% above and below this rate. On Sunday, it set this at 375 Sudanese pounds per $1. “This is definitely good news for everyone seeking to deliver value for money,” Krstic said. Insufficient budgets A key challenge was budgeting. Organizations said that funding from initial budgets was often insufficient after it was converted from foreign currency into Sudanese pounds. This made implementation, in some cases, impossible. An organization would set out to support a certain number of people, then revise budgets and request more funds from donors — or drop a project. For example, the European Civil Protection and Humanitarian Aid Operations has a partner working to provide emergency shelter to refugees and internally displaced people countrywide. The initial size of the shelters proposed were 3 meters by 5 meters per family, but this became too expensive following the exchange in currency. Instead, the size of the shelters was reduced — a tradeoff so that the number of people served stayed the same. With humanitarian funding, the EU was also forced to regularly provide no-cost extensions to allow partners to continue projects even if there were delays with implementation. It also provided its partners with 80% of the budgets upfront to allow some flexibility with the timing of the financial transfers to Sudan, so they could transfer the funds close to the date of implementation of the program. “The decision to liberate the exchange rate will definitely have a positive impact on the cost-efficiency of humanitarian projects by reducing the overall costs and allow [us] to reach more beneficiaries with the same amounts,” said Andrea Koulaimah, director for EU humanitarian operations in sub-Saharan Africa. The impact of this news on programming will vary, according to aid workers. Programs that involve more imports were less affected by the fixed exchange rate, whereas cash-based interventions were affected because the purchasing power of what people end up receiving is much lower than the value in foreign currency. The EU said in a press release that it expects the decision to float the currency will lead to a "swift launching" of the government’s Family Support Program, supported by bilateral donors, that provides cash transfers to low-income families. The program’s launch was complicated by the currency imbalance. Floating the currency is also expected to help the country with debt management. The country’s inclusion in the U.S. state sponsors of terrorism list was a key obstacle to debt relief for the country, but it was removed in December. The International Monetary Fund has also called upon the country to broaden its tax base, phase out energy subsidies and expand its social safety net, with donor support, as part of a series of broader economic reforms. Fears of increased inflation But the government’s decision to float the currency does not come without costs, as floating the exchange rate could result in even higher levels of inflation, said Jonas Horner, senior analyst on Sudan at the International Crisis Group. “The real concern was that making this jump would drive inflation to new levels that would visit further economic harm on Sudanese families, drowning the economy and driving new unrest in the streets,” he said. Because of this, the move needs to be the first in a careful sequence of economic reforms to drive long-term improvement in the economic situation, he said. Floating the currency should help Sudan gain access to bridge loans to help it get out from its loan arrears, which will help it to access international loans and financing. This will then help it gain access to foreign currency to back its own currency. “The government still needs to be in a position to actually have FOREX in its coffers, so that it can buy Sudanese pounds off the market, which will up scarcity and control inflation,” Horner said. “The government does not today have the money in its coffers … because of this, the scope is there for natural inflation to occur and for prices to rise.”